Ansys Inc. Vs. ACIT (IT) - (Income Tax Appellate Tribunal) (15 Jun 2021)

In order to bring ‘Business profits’ of a resident of the other country to tax in India within the ambit of Article 7 of DTAA, foreign enterprise must have a Permanent Establishment (PE) in India

MANU/IP/0091/2021

Direct Taxation

The assessee is a company registered in, and a tax resident of the United States of America. No return of income was filed for the year under consideration. The AO initiated the re-assessment proceedings by recording that, a receipt of Rs. 2.42 crore as a consideration for sale of Software/License relating to Development of Software from Honeywell Technology Solutions Lab Pvt. Ltd. escaped assessment as it was in the nature of Royalty chargeable to tax in India. Taking cognizance of Explanation 4 to Section 9(1)(vi), the AO held that, the receipt was in the nature of income, chargeable to tax in India not only under the Act but also under the Double Taxation Avoidance Agreement (DTAA). It is this taxability of Rs. 2.42 crore as income from Royalty by the AO in the final assessment order that has been assailed before the Tribunal.

Whereas the case of the assessee is that, the receipt from Honeywell Technology Solutions Lab Pvt. Ltd. is ‘Business Profits’ covered under Article 7 of the DTAA, the Revenue has set up a case that, it is in the nature of Royalties under the Article 12. The assessee is an American Company and hence, governed by the DTAA.

As per Article 12 of the DTAA, the Royalty means consideration for use or right to use any copyright of a literary, artistic or scientific work etc. The question whether the sale of computer software would partake of the character of Royalties or Business Profits, recently came up for consideration before the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT. After analyzing the identical issue in the backdrop of similar expression as used in Article 12(3), it came to hold that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in Section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product over which the licensee has no exclusive rights, no copyright is parted with.

In facts of the present case, it is seen that the disputed receipt of Rs. 2.42 crore from Honeywell Technology Solutions Lab Pvt. Ltd. is on account of sale of Software/license and not for parting with the copyright of the software. Since facts of the present case are similar to those considered and decided by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., respectfully following the precedent, present Tribunal held that, the amount cannot be brought within the ambit of 'Royalties' under Article 12 of the DTAA.

The case of the assessee before the authorities below has been that, the receipt is not in the nature of 'Royalty', but 'Business Profits'. In order to bring ‘Business profits’ of a resident of the other country to tax in India within the ambit of Article 7, it is sine qua non that, the foreign enterprise must have a Permanent Establishment (PE) in India in terms of Article 5 of the DTAA. In the absence of a PE, the taxability under Article 7 does not trigger. The assessee categorically submitted before the Dispute Resolution Panel (DRP) that it did not have any PE in India. As the assessee did not have a PE in India during the relevant year, the mandate of Article 7 cannot activate. A fortiori, the receipt cannot be charged to tax in India as 'Business profits' either. The amount of Rs. 2.42 crore received by the assessee from sale of software/license to Honeywell Technology Solutions Lab Pvt. Ltd. ceases to chargeable to tax in India. Appeal allowed.

Tags : ASSESSMENT TAX LEVY